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Tuesday, December 27, 2011

The subject of Dutch disease has been central to the debate of Brazilian macroeconomists and policymakers at least since commodities prices started to rise during the last decade. I believe that much of this debate is misguided, as it ignores some macro-financial interactions of great importance.

My thesis is that how the booming sector accumulates wealth is crucial to understand the consequences to the rest of the economy.

Let’s say there is a booming sector whose present income is above its permanent income (say, soy producers) and which is attempting to transfer purchasing power from the present to the future (i.e. to save).

For the sake of illustration, let’s assume that the only form of accumulating wealth was the purchase of an asset in fixed supply, such as land. Then the attempt of transferring purchasing power from the present to the future would bid up land prices and landowners would capture much of the increase in national wealth. In other words, we get a housing/land prices boom.

Now let’s introduce financial intermediaries. The booming sector now can save by purchasing assets issued by financial intermediaries who will lend the booming sector resources to sectors of the economy willing to dissave to expand their consumption or investment. In other words, the attempt to save by the booming sector fuels a credit (financial intermediation) boom.

Then notice that my argument does not mention at any point that the increased income in the booming sector is related to exports. The effort by the booming sector to save is the mechanism that causes the increase in financial intermediation or the spike in land and housing prices.

But increases in financial intermediation are also often associated with deterioration in credit quality, excessive leveraging and enhanced risk of a financial crisis. For those of us who are more inequality averse, rising land prices are a negative as the poor tend to be land-poor. It is up to policymakers to avoid the housing bubble and credit boom. It is obvious that goods and services in Brazil are excessively expensive, and for many observers, that is both cause and symptom of the loss in competitiveness that afflicts some sectors of the Brazilian economy (more noticeably, the most labor intensive sectors of manufacturing).

My point is that the key for the solution to this problem is to isolate the domestic economy from the consequences of the attempt to save by the booming sector and this can be accomplished by allowing the booming sector access to external assets, i.e., by letting the windfall leak out.

How then can policymakers make the windfall more likely to leak out? This can be done through a multi-pronged strategy.

First and foremost for the case of Brazil, access to external assets should be democratized, i.e. let soy farmers buy Apple stock on an online broker, this simple.

Second, regulations governing pension funds and institutional investors ought to lose their bias towards domestic assets. That would require a major reform and disturb powerful vested interests, but the benefits of such reform would go much farther than just macroeconomic management.

Third, let imports in! That sounds contradictory, but the more cars we import for China (and we import very little), the smaller will be the tendency of Real appreciation, and the more competitive will be our import competing industries.

But has this ever been tried? Yes, it has been tried and successfully. Chile has faced rising copper prices for the last decade, yet our finance- and trade-liberated cousins have avoided real appreciation. And just in case someone asks, they have also grown faster too.

Saturday, October 22, 2011

Movements in exchange rates during periods of increased market volatility seem to repeat similar patterns. In the chart below, I show the cross-section of depreciation rates relative to the US dollar for the periods immediately after the Lehman failure in 2008 and the most recent increase in market volatility.

In both episodes, the yen strengthened and practically all the currencies of advanced and emerging economies weakened relative to the US dollar. Some emerging currencies (Brazilian real, Polish zloty, South African rand, Mexican peso, Korean won) stood among those with the largest depreciations in both episodes. My goal now is to understand why.

Thursday, October 13, 2011

Today I updated my panel data set with quarterly GDP up to the second quarter of 2011. Adding more data only strengthens my finding that IT countries have performed better than their peers since the global financial crisis.

This paper studies the long-term consequences of the government-sponsored programs of European immigration to Southern Brazil before the Great War. We find that the municipalities closer to the original sites of nineteenth century government sponsored settlements (colônias) have higher per capita income, less poverty and dependence on Bolsa Família cash transfers, better health and education outcomes; and for the areas close to German colonies, also less inequality of income and educational outcomes than otherwise. Since that is a reduced form relationship, we then attempt to identify the relative importance of more egalitarian landholdings and higher initial human capital in determining those outcomes. Our findings are suggestive that more egalitarian land distribution played a more important role than higher initial human capital in achieving the good outcomes associated with closeness to a colônia.

Economic policies are often judged by a handful of statistics, some of which may be biased during periods of change. We estimate the income growth implied by the evolution of food demand and durable good ownership in post-reform Brazil and Mexico, and find that changes in consumption patterns are inconsistent with official estimates of near stagnant incomes. That is attributed to biases in the price deflator. The estimated unmeasured income gains are higher for poorer households, implying marked reductions in “real” inequality. These findings challenge the conventional wisdom that post-reform income growth was low and did not benefit the poor.

Resumo:
Twenty-eight months after the onset of the global financial crisis of August 2008, the evidence on post-crisis GDP growth emerging from a sample of 51 advanced and emerging countries is flattering for inflation targeting countries relative to their peers. The positive effect of IT is not explained away by plausible pre-crisis determinants of post-crisis performance, such as growth in private credit, ratios of short-term debt to GDP, reserves to short-term debt and reserves to GDP, capital account restrictions, total capital inflows, trade openness, current account balance and exchange rate flexibility, or post-crisis drivers such as the growth performance of trading partners and changes in terms of trade. We find that inflation targeting countries lowered nominal and real interest rates more sharply than other countries; were less likely to face deflation scares; and had sharp real depreciations without a relative deterioration in their risk assessment by markets. While the task of establishing causal relationships from cross-sectional macroeconomics series is daunting, our reading of this evidence is consistent with the resilience of IT countries being related to their ability to loosen their monetary policy when most needed, thereby avoiding deflation scares and the zero lower bound on interest rates.

2009. IMF Working Paper 09/33 (that is the updated version, presented at Oxford Centre for the Analysis of Resource Rich Economies 4th Annual Conference, September 15-16 2010). The final version, available upon request, is forthcoming at the Journal of International Economics.Exporters of exhaustible resources have historically exhibited higher income volatility than other economies, suggesting a heightened role for precautionary savings. This paper uses a parameterized small open economy model to quantify the role of precautionary savings in economies with exhaustible resources, when the only source of uncertainty is the price of the exhaustible resource. Results show that the precautionary motive can generate sizable external sector savings. When aggregated over the sample countries, precautionary savings in 2006 add up to 3.2 percent of GDP. The quantitative importance of the precautionary motive varies considerably across the sample countries and is driven primarily by the weight of exhaustible resource revenues in future income. The parameterized model fares well at capturing current account balances in both cross-section and time-series data.

Resumo:Economic policies are often judged by a handful of statistics, some of which may be biased during periods of change. We estimate the income growth implied by the evolution of food demand and durable goods ownership in post-reform Brazil and Mexico, and find that changes in consumption patterns are inconsistent with official estimates of near stagnant incomes. That is attributed to biases in the price deflator. The estimated unmeasured income gains are higher for poorer households, implying marked reductions in “real” inequality. These findings challenge the conventional wisdom that post-reform income growth was low and did not benefit the poor.

This paper studies the long-term consequences of the government-sponsored programs of European immigration to Southern Brazil before the Great War. We find that the municipalities closer to the original sites of nineteenth century government sponsored settlements (colônias) have higher per capita income, less poverty and dependence on Bolsa Família cash transfers, better health and education outcomes; and for the areas close to German colonies, also less inequality of income and educational outcomes than otherwise. Since that is a reduced form relationship, we then attempt to identify the relative importance of more egalitarian landholdings and higher initial human capital in determining those outcomes. Our findings are suggestive that more egalitarian land distribution played a more important role than higher initial human capital in achieving the good outcomes associated with closeness to a colônia.